By Babajide Komolafe, Economy Editor

Nigeria’s economy is buffeted with various headwinds resulting in macroeconomic instability with symptoms including persistent rise in inflation, exchange rate instability, and high unemployment. 

In a bid to effectively tackle these challenges, the Governor, Central Bank of Nigeria, CBN, Mr. Olayemi Cardoso over the weekend unveiled a new agenda for achieving macroeconomic stability with five five pillars. 

These pillars as announced by Cardoso in his keynote address at the 2023 Annual Bankers Dinner of the Chartered Institute of Bankers of Nigeria, CIBN include banking recapitalisation, New Forex Rules, New Monetary Policy Tools, New Licensing Framework for fintechs, New Credit Expansion strategies. 

Banking recapitalisation 

The last banking recapitalisation was conducted in 2004 when the CBN raised the minimum capital base of banks to N25 billion. 

Cardoso however opined that the industry is due for another capitalisation exercise given the impact of economic headwinds of inflation, naira depreciation and President Tinubu’s vision for a $1 trillion economy. 

Stressing the rationale for a new capitalisation exercise for banks, Cardoso said: “A thorough assessment of the economy reveals significant challenges, including high and rising inflation, inadequate foreign exchange supply, depreciation of the exchange rate, limited external reserves, weakened output, and high unemployment. 

“These challenges have led to increased interest rates, discouraging investments in productive activities. Within the banking system, high inflation has affected asset quality and solvency ratios. Additionally, the persistent depreciation of the naira poses a significant risk for domestic banks with foreign exchange exposures. 

“Despite the challenging global and domestic macroeconomic environment, Nigeria’s financial sector has demonstrated resilience in 2023, with key indicators of financial soundness largely meeting regulatory benchmarks. Stress tests conducted on the banking industry also indicate its strength under mild-tomoderate scenarios of sustained economic and financial stress, although there is room for further strengthening and enhancing resilience to shocks. Therefore, there is still much work to be done in fortifying the industry for future challenges, a topic that I will delve into later in my address. 

“The economic agenda of President Bola Ahmed Tinubu’s administration. The administration, as outlined in the widely circulated Policy Advisory Council report on the national economy earlier this year, has set an ambitious goal of achieving a Gross Domestic Product (GDP) of $1.0 trillion over the next seven years, with clearly defined priority areas and strategies. 

“Considering the policy imperatives and the projected economic growth, it is crucial for us to evaluate the adequacy of our banking industry to serve the envisioned larger economy. It is not just about the stability of the financial system in the present moment, as we have already established that the current assessment shows stability.

“However, we need to ask ourselves: Will Nigerian banks have sufficient capital relative to the financial 14 system’s needs in servicing a $1.0 trillion economy in the near future? In my opinion, the answer is “No!” unless we take action. Therefore, we must make difficult decisions regarding capital adequacy. As a first step, we will be directing banks to increase their capital.” 

New Licencing Framework for Fintechs

Speaking on the need for a new licensing framework for fintechs and other players in the payment system, Cardoso said: “Technology will continue to play a critical role in delivering financial services and enhancing financial inclusion. However, recent developments in the payment services landscape have raised concerns regarding the use of technology and the existing licensing and regulatory framework. 

“We have observed that some licensees are operating outside the approved activities, breaching the boundaries set for them. 

“Any intentional or unintended noncompliance will be subject to sanctions, as operators have the responsibility to ensure that they are licensed for the activities they undertake. 

“Concurrently, as we conduct a comprehensive review of the licensing framework for payment services, we will engage in extensive consultations to develop a new regulatory and compliance framework that is suitable for the technology-driven payment services sector. 

New Forex Rules

A major pillar under Cardoso’s agenda for macroeconomic stability is a set of new rules and guidelines to achieve exchange rate stability. 

Speaking in this regard, the CBN Governor, said: “Stabilizing the exchange rate is another critical aspect of our efforts to promote economic stability. I had the privilege of speaking with business owners engaged in international trade. 

“They recounted the difficulties of navigating the fluctuations in the exchange rate, which often led to uncertainties and unexpected costs. The volatility in the foreign exchange market disrupted their planning and hindered their 18 ability to make informed business decisions. It is imperative that we provide transparency and create a market environment that allows fair determination of exchange rates, ensuring stability for businesses and individuals alike. 

“In order to ensure the proper functioning of domestic and foreign currency markets, clear, transparent, and harmonized rules governing market operations are essential. New foreign exchange guidelines and legislation will be developed, and extensive consultations will be conducted with banks and FX market operators before implementing any new requirements. 

“We have already witnessed improvements in FX market liquidity in recent weeks, as the market responded positively to tranche payments which have been made to 31 banks to clear the backlog of FX forward obligations. 

“We have been subjecting these payments to detailed verification to ensure only valid transactions are honored. In a properly functioning market, it is reasonable to expect significant FX liquidity, with daily trade potentially exceeding $1.0 billion. We envision that, with discipline and focused commitment, foreign exchange reserves can be rebuilt to comparable levels with similar economies. 

“As the monetary authority, we are taking measured and deliberate steps to send the right signals to the market and achieve our 26 mandate. To ensure stability, curb speculation, and restore confidence in the foreign exchange market, we have initiated the payment of unsettled forward foreign exchange obligations, and these payments will continue until all obligations are cleared. This intervention has already had a positive impact on liquidity and has led to a significant appreciation of the exchange rate at certain points. 

New Monetary Tools

 In its bid to expand credit to the economy, the CBN in the recent past embraced unorthodox monetary policy while it relied heavily on interest rate hikes to curb inflation. 

But under the new agenda unveiled by Cardoso, the apex bank will jettison unorthodox monetary policies, adopt inflation targeting, pursue aggressive liquidity mop up through regular Open Market Operations and sustained Cash Reserve debits. 

Explaining steps in this regard, Cardoso said: “The Central Bank of Nigeria is committed to achieving monetary and price stability. This is not just a technical objective, but it has real-life implications for the wellbeing of our citizens. 

“Through targeted policies, transparent market operations, and coordination between monetary and fiscal authorities, we can ensure a more stable exchange rate, control inflation, and create an enabling environment for businesses and individuals to thrive. 

“Our monetary policies will aim to achieve price stability, foster sustainable economic growth, stabilize the exchange rate of the naira, and reduce interest rates to facilitate borrowing and investments in the real sector. 

“In line with our strategy to refocus on our core mandate, the CBN will discontinue direct quasi-fiscal interventionist activities and instead utilize orthodox monetary policy tools for implementing monetary policy. “As part of this refocus, the CBN has just approved the adoption of an explicit inflation-targeting framework to enhance the effectiveness of our monetary policy. 

“The details and requirements for this framework are currently being finalized alongside the fiscal authorities. Additionally, the CBN will provide forward guidance, enhance transparency, and maintain effective communication with the public to anchor expectations and build trust among stakeholders. 

“We have critically reviewed the effectiveness of the Central Bank’s monetary policy tools and have spent time fixing the transmission mechanism to ensure the decisions of MPC meetings actually result in desired objectives. 

“For quite some time, there has been a dislocation of our monetary transmission mechanisms rendering the MPC meetings largely ineffective. 

“Regular Open Market Operations (OMO) to mop up excess liquidity from the banking system. 

“Removal of the cap on the remunerable Standing Deposit Facility (SDF) to increase activity in the SDF window and manage liquidity.

 “Sustained Cash Reserve Requirement (CRR) debits, which have moderated liquidity in September and October 2023. 

“Inauguration of a new liquidity management committee within the Bank that meets daily at 8am to assess liquidity conditions and ensure optimal levels. “These measures have already started to yield results, as excess liquidity in the banking system has significantly reduced and the Overnight Bank Borrowing (OBB) rate has increased to a level consistent with the monetary policy program.”